Alexander Reid, National Leader of BakerHostetler’s Tax-Exempt Organizations and Charitable Giving team, submitted comments to the Treasury Department’s proposed regulations which seek to clarify that certain schools that discriminate on the basis of race are not operated exclusively for charitable purposes. The proposed regulations have yet to be made public, but they stem from Treasury’s 2025–2026 Priority Guidance Plan, which includes the following priority item:

Guidance on the application of the fundamental public policy against racial discrimination, including consideration of recent caselaw, in determining the eligibility of private schools for recognition of tax-exempt status under §501(c)(3).

The political and legal landscape since the Supreme Court’s decision in Students for Fair Admissions, Inc. v. President & Fellows of Harvard College suggests that proposed regulations may target schools operating with race-conscious policies and practices to address systemic and structural discrimination.

But even before the substance of the specific proposed regulations is reviewed, there is the question of whether Treasury (which includes the IRS) has a legal and Constitutional basis for making determinations on what fundamental public policy is and using such determination to make decisions on whether an organization qualifies as tax-exempt under IRC Section 501(c)(3). Congress did not enact a fundamental public policy determinant and under the 2024 Supreme Court decision in Loper Bright Enterprises v. Raimondo, Treasury would not benefit from a court’s deference if this regulation is promulgated and then challenged.

With his permission, I reproduce below Alex’s letter to the persons at Treasury he met with to discuss the proposed regulations and the misuse of a fundamental public policy doctrine.

Reid Letter

July 24, 2026

RIN 1545-BS05
Guidance on the application of the fundamental public policy against racial discrimination in schools. Proposed amendment to 26 C.F.R. § 1.501(c)(3)-1(d)(2)

Dear William, Heidi, and Terry:

Thank you for meeting with me today and for the opportunity to comment on Treasury and the IRS’s planned guidance concerning the fundamental public policy against racial discrimination in schools. The Unified Agenda identifies this as a prospective amendment to Treasury Regulation § 1.501(c)(3)-1(d)(2), which defines the meaning of “charitable activity” under section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “Code”). 

As we discussed this afternoon, Section 501(c)(3) specifies the organizational and operational requirements for charitable organizations to qualify for tax exemption. The statute does not include any reference to fundamental public policy. 

The revocation of tax-exempt status sustained in Bob Jones University v. United States, 461 U.S. 574 (1983) arose from the exceptional context of racial exclusion and segregation in private education, specifically a campus policy against dating a person of another race. While the Court held that Bob Jones University’s policy violated fundamental public policy, the Court treated such public-policy determinations as sensitive and stated that a finding that an institution is not charitable should be made only where there is no doubt that its activity conflicts with a fundamental public policy. The decision’s holding did not provide a general administrative license for Treasury to determine, case by case or administration by administration, whether a school’s otherwise statutory educational activities accord with the agency’s view of public policy.

In Students for Fair Admissions, Inc. v. President & Fellows of Harvard College, 143 S. Ct. 2141 (2023), the Court held that the particular admissions systems at Harvard and UNC did not satisfy Equal Protection Clause and Title VI requirements. Its analysis focused on university admissions and the institutions’ asserted interests, methods, and lack of measurable endpoints. The opinion’s statement that “eliminating racial discrimination means eliminating all of it” should not be converted into a general rule of federal tax law for all schools and other charities. A judicial observation in the discrete university-admissions setting is not the settled, cross-branch consensus concerning a particular charitable activity that Bob Jones required. Nor did Students for Fair Admissions decide whether private remedial charitable assistance conflicts with § 501(c)(3), whether it implicates a separate statutory prohibition, or whether its restriction would survive First Amendment scrutiny.

A regulation that makes tax exemption turn on a school’s compliance with an indeterminate fundamental-public-policy requirement would burden core First Amendment interests in speech, religion, association, and institutional autonomy because it would affect mission-defining choices such as curriculum, admissions priorities, faculty composition, and scholarship criteria. Those choices are integral to a school’s identity and expression of its ideas, and a tax-exemption rule that conditions continued recognition on abandoning them would require a concrete governmental interest and a closely tailored fit.

In Americans for Prosperity Foundation v. Bonta, 141 S. Ct. 2373 (2021), the Supreme Court applied exacting scrutiny to a compelled-disclosure rule burdening charitable association. The Court required a sufficiently tailored fit between the challenged requirement and the asserted governmental interest. In First Choice Women’s Resource Centers v. Davenport, 146 S. Ct. 1114 (2026), the Court recognized that a government demand that chills support for a nonprofit inflicts a present associational injury and described governmental action curtailing associational freedom as warranting the “closest scrutiny.”

Imposition of a fundamental-public-policy condition on schools would be unlikely to survive exacting scrutiny. Such a condition would be indeterminate, would authorize the IRS to impose the severe consequence of loss of exemption based on an asserted policy judgment, and would be poorly tailored where existing statutes already prescribe the relevant legal obligations. Treasury should not use a generalized public-policy condition to require schools to abandon mission-defining choices without identifying the precise governmental interest, the regulated practice, and the narrow connection between that interest and the threatened denial or revocation of exemption.

Moreover, such a rule would likely exceed Treasury’s statutory authority because it would add a disqualifying condition not found in section 501(c)(3) and not supplied by Bob Jones. Two recent decisions demonstrate the applicable administrative-law principle. In Nat’l Council of Nonprofits v. McMahon, No. 25-13244-MJJ, Civil Action 25-13242-MJJ (D. Mass. June 30, 2026), and Robert F. Kennedy Center for Justice & Human Rights v. McMahon, No. 25-03860 (AHA) (D.D.C. June 30, 2026), two federal district courts vacated the Department of Education’s Public Service Loan Forgiveness (“PSLF”) rule that excluded otherwise qualifying employers from the program based on the Secretary’s finding that they had a “substantial illegal purpose.” Although those cases arose under a different statute and program, their relevance is structural rather than program-specific: an agency may not use general rulemaking authority, or its own view of public policy, to add eligibility disqualifications Congress did not enact. That principle applies with particular force here. Neither § 501(c)(3) nor Bob Jones authorizes Treasury to impose a general fundamental-public-policy requirement on schools or other charitable organizations. Nor does Students for Fair Admissions v. Harvard supply the missing authority.

In conclusion, Treasury should not create an independent, open-ended fundamental-public-policy requirement by regulation. Such a requirement raises serious First Amendment concerns and, if applied to prohibit scholarships for students of color, would likely exceed Treasury’s statutory authority under the reasoning of the recent PSLF vacatur decisions. OIRA should require the agency to clarify these limits before proceeding with an NPRM. Treasury should state expressly that no fundamental-public-policy requirement applies to schools or other charitable organizations beyond section 501(c)(3)’s statutory requirements and that the IRS and future administrations lack authority to deny or revoke exemption based on an indeterminate policy judgment not enacted by Congress.

Thank you for your consideration of these comments.

Yours sincerely,

Alexander Reid

Related Resources

Alex Reid Submits First Public Comments on Proposed Fundamental Public Policy Regulations (Darryl K. Jones, Jonesing for Nonprofits)

Once and Future Revocation of Tax Exemption for Pursuit of DEI and Other Alleged Violations of Section 501(c)(3) (Ellen P. Aprill, SSRN, The Tax Lawyer (forthcoming))

Inside Job: How Foundations Can Respond to the Challenges Facing Philanthropy in Compliance with Law and Avoid Illegality (Joshua J. Mintz, MacArthur Foundation)